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Home loan firms may see new lending rate norms

Joydeep Ghosh  |  Mumbai 

NHB to start the exercise for a smooth transition.

After banks, it’s the turn of housing finance companies to have a more transparent regime for pricing of The (NHB), the regulator for these companies, is working on a system that is similar to the base rate regime introduced for recently.

“We will keep a close watch on how the base rate system works out for over the next two quarters. By March, we will have enough reference points to take a view, based on which, we should be in a position to start moving towards a similar regime,” NHB Executive Director said.

The base rate, substitute for the earlier benchmark prime lending rate (BPLR) for banks, was introduced from July 1. The country’s largest lender, State Bank of India, fixed its base rate at 7.5 per cent. The rate for most is in the range of 7.25 to 8 per cent.

Housing Development Finance Corporation and are two major players in the home loan market. Since they come in the non-banking financial institution category, they were excluded from the base rate system.

Analysts said introduction of a base rate was likely to put pressure on housing finance companies because of the transparency it would bring. There are expectations that market forces (read home loan borrowers) might put pressure on them to make rates more transparent.

“Housing finance firms would be under a lot of pressure to come up with a more transparent mechanism. The floating rate of interest will have to be based on certain parameters that will move in both directions. It cannot remain sticky for too long any more,” said a banker.

The main problem for these companies in moving to such a system is their cost of funds. While depend on a more stable system, of deposits from their consumers, home loan companies have to borrow from and other sources.

“Home loan companies are more heterogeneous than Their cost of funds, therefore, is quite different,” added Verma.



> To watch banks’ base rate system for next two-three quarters

> To start a system to ensure smooth transition after March

> To keep an eye on cost of funds of HFCs, especially from banks


> Cost of funds from may be higher

> Pricing mismatch between assets and liabilities

> A more transparent rate may lead to higher volatility

These companies are one of the largest borrowers from Also, the pricing of bonds they issue are dependent on market conditions. As a result, they are more impacted by liquidity conditions.

There are also fears that any transparent rate, which is a function of cost of funds, will be highly volatile in nature. For, while their costing can vary widely, the assets they provide are for the long term. There could be a pricing mismatch.

In addition, since cannot lend below their base rate in the new regime, there are fears that if the rate is on the higher side, the cost of funds for housing finance firms will go up substantially. This, in turn, will impact their lending rate.

First Published: Wed, July 07 2010. 00:49 IST